The articles in this section are mostly about market psychology. As a trader, you have to be aware of market psychology, what it does to you, but also what it does to other market participants. Every trader at some point realizes that everything is not what it always seemed to be. There is a somewhat hidden reality behind the obvious one. Getting to know this hidden reality, this different view on the markets and human behavior, will likely make you a better a trader in the end.
Many traders read all the news, rumors, gossips they can get their hands on. And there's always more to read. Then they start convincing each other on chat forums that the market has to go in a certain direction based on that news. In the end they all agree, but we know what happens with crowd consensus.... it's not going to happen.
In this article, I would like to discuss the subject of overconfidence. Maybe in some way overconfidence can be looked at as the exact opposite of perfectionism. Neither emotions serve a trader well as they do not take the market (movement) for what it really is.
Some say in trading the true character of a person comes forward with all its strengths and weaknesses. Suppose a trader has a tendency to be perfect, to perform each and every little task in perfection. For people with perfectionism, it may not be that hard to function in everyday life, maybe with a little struggle here and there. But it's very hard to combine perfectionism with trading.
If you have a losing trade that was stopped out, and maybe a string of losing trades, this might upset and frustrate you as a trader. You start to wonder how you ended up on the wrong side of the market each and every time.
As some of the regular visitors probably know, I am a great fan of Dr. Brett N. Steenbarger. I remember reading one of his articles where he discussed the problem of being addicted to trading. To illustrate this, he showed a list of questions that was normally used to determine whether someone was addicted to alcohol.
We like to think that humans make decisions in a rational and logical way like computers do. Most economists model the consumer as a rational being, a consumer that makes well informed rational decisions.
Everybody knows this feeling and also knows it is a false feeling. You're in a casino, and the roulette hits red. Then again and again. After three, four maybe five times red in a row, you start to think it's time for the roulette to hit black. Now, in this simple case, you know that's not true.
We have discussed this issue multiple times before. When you are trading, you have to let go of your ego. This also applies to the kind of news a trader reads or the kind of chat rooms and forums the trader is taking part in. There are websites that always bring bullish news and opinions. There are others which are always bearish. Most often this is not high-quality journalism, but more like someone with a loud voice claiming all sorts of things.
Often times, traders feel that the market is full of opponents called 'they'. Traders have the feeling that 'they' (these opponents) are out there to get them. 'They' are pushing the market higher after which 'they' will let it drop. 'They' will hit your stop loss and then 'they' will steal your money. Usually 'they' are the banks, the big funds that can really move the markets. In other words: The Evil. And what 'they' are trying to do is always so obvious, it's almost a crime.
.... that you are thinking that he is thinking? This is the funny paradox that is a big factor in the financial markets. In 'A mathematician plays the stock market' by John Allen Paulos (it's in my bookstore), the author analyzes where this is going and what it means.
Frustration among traders is very common when they go short on anticipation of bad economic data (or long on good economic data). This is due to the fact that in many cases the market does not always come down on bad economic data, or vice versa does not always rise on good economic data. Bad is good sometimes, and good is bad. Traders are frustrated because the market is not doing what they think it is 'supposed to do'.